Why Google's Second Quarter Earnings Could Mean Billions For Vringo

Jul.23.12 | About: Alphabet Inc. (GOOG)

On July 19th, Google Inc. (NASDAQ:GOOG) announced year-on-year revenue growth of 21% in its second quarter financial results. Based on these earnings, as well as Google's 5-year projected growth rate of 18.1%, the patent lawsuit recently filed against the company by I/P Engine Inc. could result in billions in damages.

I/P Engine Inc. is a wholly-owned subsidiary of Innovate/Protect Inc., a company that merged with Vringo Inc. (VRNG) last week. Vringo's lawsuit claims that Google willfully infringed upon two of the company's patents that classify how search and advertisement results are sorted. Since James Altucher's original article in April 2012 detailing the patent suit, Vringo's stock price doubled and is currently trading at over $4 a share. Billionaire Mark Cuban also purchased over one million shares in Vringo stock in mid-April.

As it pertains to the case, further analysis of Google's second quarter financial report reveals two details that could weigh on the court's decision or a potential settlement. First, the company reported that nearly $11 billion of its $12.21 billion quarterly revenue was derived from Google-owned sites, partner sites, and associated advertising, which is equivalent to over 90% of total revenue. This means that the main source of Google's revenue stream could be based on the techniques patented by I/P Engine.

Second, the technique driving Google's revenue is still growing in popularity. Per the report, paid clicks increased approximately 42% in the second quarter. This growth is correlated to advertisements on both Google and Network members' sites, which means it is directly related to the claims made in Vringo's lawsuit.

These details in the financial report demonstrate that activity on websites doing business with Google is increasing and that Google revenues are growing accordingly. The Vringo suit claims that Google earned $67 billion in revenue by infringing on its patent. Considering Google's projected 5-year earnings of 18.1% and assuming it remains constant over a ten-year span, the $67 billion revenue figure could increase to nearly $350 billion.

Since willful infringement patent claims can result in up to triple damages, this case could potentially result in a court decision paying Vringo billions. A court ruling of this magnitude is not unprecedented as NTP Inc. won a $600 million patent infringement claim against Research in Motion (RIMM), a much smaller company than Google.

Furthermore, in mid-June, the United States District Court hearing the case sided with Vringo on several definitions used in the lawsuit that were disputed by Google. This could be a positive indicator that the court will rule in favor of Vringo, and could also increase the likelihood of a settlement before the court hands down a decision. A settlement with Google would still land Vringo hundreds of millions, and possibly even billions. Either way, Google investors should continue to watch this case closely as it certainly will impact the company moving forward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: The writer is not a licensed broker or investment adviser and therefore cannot recommend that you buy, sell, or hold any security. While every attempt was made to verify the information in this report, much has been derived from public sources and cannot be guaranteed for accuracy.